March 16, 2020 - 1:30pm EST by
2020 2021
Price: 51.90 EPS 1.9 2.16
Shares Out. (in M): 53 P/E 27.3 24
Market Cap (in $M): 2,960 P/FCF 0 0
Net Debt (in $M): -5 EBIT 0 0
TEV ($): 2,955 TEV/EBIT 0 0
Borrow Cost: General Collateral

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The private equity bubble has officially burst – so how can we short private markets in the public market?  More or less every recent vintage is now massively under-water (read: worthless).  More importantly – the sponsors have been running around like drunken sailors for the past 5 years getting anything and everything passed by auditors and creditors as it relates to EBITDA.  Sponsor multiples were on average 12x “EBITDA” in recent years with 6x debt but look under the hook and the truth is that EBITDA was inflated to the tune of 20-30%.  The result? With IWM back at levels from 5-years ago and with PE sporting only 2-3x the debt levels of the IWM, PE is worthless.  And no, we don’t think sponsors are getting any bailouts when even cities and munis are going to be in-line waiting for hand-outs.  To channel our inner Bernie - we need to build hospitals and improve our infrastructure now – not bail out billionaires.  Thanks to PE managers, pensions and foundations have lost anywhere from 10-20% of assets – permanently.  In the coming months they will realize this sad truth. 

Private equity owned companies employ over 6 million Americans and as job losses hit the market, a disproportionate share of job losses will fall on employees of PE companies.  Not only are these portfolios wipe-outs, but thanks to the leverage levels in PE backed companies, job losses will be staggering as PE funds do what they can to keep current on debt service.  We believe the PE model as it exists today will collapse due to shifting regulatory views of an industry that has walked away with billions of dollars while its investors and its stakeholders have lost it all.  Expect Warren to have a main role in a Biden administration – and expect PE to be regulated in an extreme manner.  Thanks to PE we have exacerbated a crisis because PE leaves companies with no “rainy day fund” through wonderfully thoughtful moves such as aggressive special dividend recaps.  Public companies were quick to create COVID-19 messaging while PE firms were quick to ignite layoffs.  A regulatory super storm is brewing.

We speak to PE managers who still have their heads in the sky and are not aware of how dire the business outlook is for them on a go forward basis.  Managers have long played games with their marks, but with the IWM wiping out 5 years of gains, managers will have to now begin taking mark downs on their portfolios.  Worse yet, the mythical “PE capital on the sidelines” will now have to be deployed into existing companies to help keep them afloat.  Does anyone reasonably expect PE funds to hold onto their 2% management fees on committed capital while they sit on zombie portfolios that will at best return cost over the next decade?  Will PE funds continue to draw monitoring and advisory fees that are little more than hidden fees LPs should have long removed?  We expect deals will be re-cut in material ways.  Here is the dirty secret – in 2009 many PE funds were forced to MASSIVELY cut their existing and forward fees to hold onto investors.  At the end of this rout, anywhere from 50-75% of PE funds will be gone.

One way to play this theme is obviously the GPs (Apollo, KKR, Blackstone etc).  Some of these managers deserve to be investigated and shut down for their tactics (more on this another day), but many are in the “too big to disappear” category.  We are proposing a less crowded alternative that trades at a nosebleed valuation and that has existential risk – Hamilton Lane.  Hamilton Lane is effectively a fund of funds – they charge a little more than 50bps to steer investors into alternatives.  They also buy portfolios of existing PE assets from LPs as well as provide advice for a fee on the best PE funds to invest in.  Great business right?  Charge 50bps to steer people into PE funds, all of which simultaneously got wiped out and that layer on 200-300bps on top of Hamilton Lane’s fees. 

From an advisory perspective, we believe Hamilton Lane is also absolutely terrible. They steered investors into Abraaj years ago (~$470MM ), which ended up being  a  fraud.  We spoke with industry sources who told us it was widely known that Abraaj was a fraud and that Hamilton Lane was one of the only large tier institution that was stupid enough to fall for it.  The following Bloomberg article details the events: https://www.bloomberg.com/news/articles/2019-05-05/abraaj-investor-hamilton-lane-among-several-warned-about-fund 




Hamilton Lane is trading as if it is a secular growth story when in reality it faces secular risk.  30x PE multiple for HLNE is insanity.  The back book of carried interest will likely be wiped out, and few surviving desperate sponsors will cut deals directly with large LPs on future funds – at huge discounts.  We believe Hamilton Lane introduced smaller institutions that had no business investing in PE funds in the first place.  These smaller institutions will likely never return.

HLNE is priced as a secular grower but is in fact facing complete losses on its investment portfolio and existential risk in the future as smaller institutional investors leave PE all together or transact directly with sponsors instead of paying 55 bps for useless advice.

We think the stock should trade at a 10x PE in the new market paradigm, so think its worth at best $20/sh.


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PE meltdown, decline in AUM.

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